UPDATE 4-Japan's NEC Electronics, Renesas in merger talks

* Aim to merge to create world's No. 3 chipmaker

* Could trigger more realignment in battered sector

* Hitachi: applying for public funds is option for new firm

* NEC Elec shares end down 5.4 pct before announcement

By Sachi Izumi

TOKYO, April 27 (Reuters) - Japan's NEC Electronics (6723.T) and Renesas Technology said they were in talks to merge next year to create the world's third-biggest chipmaker after Intel Corp (INTC.O) and Samsung Electronics (005930.KS).

Semiconductor makers, hammered in a prolonged downturn due to oversupply, price plunges and sluggish chip demand, have been joining forces to survive.

Analysts have said NEC Electronics and Renesas' move, which was widely expected, could be followed by Toshiba Corp (6502.T) seeking a chip tie-up with Fujitsu Ltd (6702.T) as the two had reportedly discussed possible mergers of operations with NEC Electronics.

Deutsche Securities analyst Takeo Miyamoto said agreeing on a merger was the easiest step for NEC Electronics and Renesas, but they would have to make even tougher decisions from here.

"The companies have a lot of overlapping businesses, and it would be impossible to keep all of the operations," he said. "We will be closely watching who makes what kind of decisions and who carries that through."

NEC Electronics, 65 percent owned by NEC Corp (6701.T), and Renesas, a joint venture between Hitachi Ltd (6501.T) and Mitsubishi Electric Corp (6503.T), said they plan to merge next April, aiming to boost their global competitiveness in microcontrollers, system and discrete chips.

The new firm would aim to generate 60 percent of sales overseas in the future, up from 44 percent currently, the companies said.

NEC Electronics chief executive Toshio Nakajima said his company and Renesas were slashing a combined 200 billion yen in costs and did not expect the new company to be in the red.

But Hitachi chief executive Takashi Kawamura said applying for public fund would be one option for the merged entity to beef up its weak finances.

NEC Electronics and Renesas aim to sort out the details of the deal by the end of July and aim to keep the merged entity listed. NEC Electronics will probably absorb Renesas, owned 55 percent by Hitachi and 45 percent by Mitsubishi Electric, NEC said.

EYES ON GLOBAL MARKET

NEC Electronics and Renesas both specialise in microcontrollers and system semiconductors, and the combined company would have annual sales of nearly $13 billion, making it Japan's biggest chipmaker, surpassing Toshiba Corp (6502.T).

Renesas is the world's biggest microcontroller maker, and the union with NEC Electronics would give them about a 30 percent global market share, much bigger than No. 2 maker Freescale Semiconductor [FSLSM.UL].

"Considering the prospects of the semiconductor market, we must create a business model that can win globally," NEC president Kaoru Yano told a briefing.

"We believe this (NEC Electronics-Renesas) combination is the best not only to survive severe business conditions but to fly high in the global semiconductor market after the downturn," he said.

Microcontroller chips are often used in automatically controlled devices such as car engine control systems and power tools, while system chips control multiple functions in electronics and cars.

Discrete chips are simpler semiconductors that control functions inside bigger integrated microchips.

NEC Electronics has teamed up with Toshiba while Renesas has allied with Panasonic Corp (6752.T) to develop more powerful chips with finer circuitry. These separate partnerships will not be affected for now, the companies said.

Japan's Elpida, the world's No. 3 maker of dynamic random access memory (DRAM), said on Monday that it estimated its net loss to have ballooned almost eight-fold last financial year on Monday. [ID:nT214749]

Its 180 billion yen ($1.9 billion) loss estimate for the year ended March 31 was bigger than a consensus forecast of a 159 billion yen loss in a poll of 17 analysts by Thomson Reuters. Elpida trails Samsung and Hynix Semiconductor (000660.KS).

Before the announcement, NEC Electronics shares closed down 5.4 percent at 1,080 yen, against a 0.2 percent gain in the benchmark Nikkei average .N225.

The official announcement was widely expected after sources told Reuters earlier this month that NEC Electronics and Renesas aimed to merge in early 2010. [ID:nT223191] (Reporting by Sachi Izumi; Editing by Chris Gallagher)